FXStreet (Mumbai) - It is eight days to the ECB meeting on 2nd December and speculation with respect to the ECB’s QE programme abound. ECB is believed to be discussing 20 easing options for next Thursday. ECB president Draghi has hinted at further easing to raise inflation in the bloc. Talks on various easing tools are doing the rounds in the market. It must be remembered however that all tools are untested. The ECB is probably looking at surprising the markets; however, like an anonymous ECB source said “you cannot surprise indefinitely”.

The ECB may opt to buy regional bonds under its QE expansion programme. A Reuters report yesterday caused quite a stir in the market with the news that the central bank was considering purchases of regional bonds and even buying rebundled loans. However, buying bank loans will likely come with the risk of non-payment attached to it. Also, the courts and Germans will not be too happy with this buying of bank loans tool.

The Reuters report also stated the possibility of the ECB officials implementing a two-tier penalty charge on banks that leave cash with the ECB. The two-tier deposit rate system will soften the impact of a deposit rate cut on banks, if the ECB chooses to slash rates further.

A discussion on split-level rate, to impose a higher charge on banks depending on the amount of cash they deposit with the ECB, is most likely being discussed by officials. The split-level rate if implemented will increase the lower bound potential for short-end Euro rates.

The ECB has hinted that it might cut rates further into negative territory. Markets also expect ECB to cut deposit rate more than just 0.10 per cent. This expectation caused German two and five year bonds to decline to record lows yesterday. It caused the euro to fall further. It must be noted here that the deposit rate cut has worked well in Switzerland.

The markets are expecting another 300 billion in bond buying under ECB’s QE expansion programme when the central bank meets next Thursday.

Aggressive easing expected to be announced at next week’s policy meeting will further weigh on the euro which has already fallen sharply over the last month.

Meanwhile the ECB gave advance warning that it will put its Asset Purchase Program on temporary hold on Dec. 22. It said it will resume the quantitative easing program on Jan. 4.
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